Hyden, Miron & Foster, PLLC Law Blog

Monday, July 20, 2020

What Is an Intentionally Defective Grantor Trust (IDGT)?

The impact estate taxes can have on your ability to most effectively transfer wealth to your heirs is an important consideration. Estate taxes, both at the federal and state level, can take a substantial chunk of your estate’s value away from your intended beneficiaries. Through properly employing different estate planning techniques, you can significantly reduce the amount of your estate lost to estate taxes. One such technique is through the use of an Intentionally Defective Grantor Trust (IDGT).

What is an Intentionally Defective Grantor Trust (IDGT)?

An IDGT is a type of trust where assets are transferred into a trust, but the grantor is still responsible for paying income taxes assessed on the transferred assets. This is why it is considered “defective.” There is a purposeful flaw in an IDGT trust structure that continues to hold the grantor responsible for paying income taxes. For purposes of income tax laws, the transfer of assets into the IDGT, away from the grantor, will not be recognized.

Usually, the trust is tasked with paying income on trust assets. This not only leads to a reduction in the value of the assets, but also eats away at the proceeds intended to go to the named trust beneficiaries. Because the grantor pays income taxes for the trust, the trust assets grow free of income-tax. Additionally, while the grantor pays income taxes for the trust, the trust itself will fall outside of the grantor’s taxable estate meaning the assets held in the trust will not be included in assessing estate tax liability.

The way an Intentionally Defective Grantor Trust is set up makes it a great option for assets with high appreciate values. The trust beneficiaries get to receive the full value of these assets without worrying about taxes owed. Additionally, the trust grantor has paid the income taxes associated with the appreciating assets and so the beneficiaries will not need to worry about that as well.

Estate Planning Attorneys

Trusts are complex and are, thus, often overlooked when approaching the estate planning process. Trusts, however, offer a wide variety of substantial benefits when properly utilized and structured. This is especially true for high net worth individuals. The thing about reaping the full benefits of careful, comprehensive estate planning is that time is of the essence. In order to maximize the benefits of estate planning, start now. The dedicated team of estate planning and tax attorneys at Hyden, Miron & Foster are committed to designing estate plans that meet the unique and varied interests of each of our clients. At our firm, there is no such thing as a “one size fits all” estate plan. We will work with you to help ensure that you have an estate plan that most effectively protects your interests and that of your loved ones into an indefinite future. Contact us today to learn more about your estate planning options. We are here to answer any questions you may have.

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